University of Luzon Graduate School

Dagupan City
Chapter I

THE PROBLEM AND ITS BACKGROUND

Rationale

Every government faces policy choices concerning how to manage

its debt, including the sources of financing, the scope of the debt to be

managed, how to manage contingent liabilities, how to coordinate debt

management with other public policy objectives, and how to structure

the legal authority for borrowing and the institutional arrangements for

carrying out this authority. Although practices differ, there is a growing

convergence on the basic principles of sound public debt management.

These include the importance of clear objectives for public debt

management and the need for careful coordination of debt management

objectives and practices with other public policies. The benefits of

transparency of debt management objectives and policies and clear

accountability for achieving these objectives and implementing the

policies (http://pubdocs.worldbank. org/en/ 903731510086355711

/PDM-Publication DomesticDeb/March/2020).

One of the major challenges to the effective use of government debt

is finding ways to solve the problem it is causing. These challenges often

refer to regulating the size, structure and refinancing of government

debt. Government debt management itself (Zahariev, 2012) could be

defined as all actions of the country, including the central bank, which

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influence the size, structure, performance and repayment of government

obligations. Effective debt management methods are required to achieve

the key objectives. According to the conditions and the mechanism of

performance, they can be classified as market and non-market methods.

According the nature of changes in debt conditions, the methods can be

divided into active and passive. Depending on the nature of the tasks to

be solved, the methods for managing the government debt can be

distinguished (Grandars, 2019) by budgetary and financial-technical

ones.

Budgetary methods include, long-term solutions related to solving

the problem of foreign debt, stimulating the trade balance of the country,

increasing the gross domestic product and the state budget. The

financial-technical methods are short-term and allow solving the debt

problem by improving the terms of the loan, changing the timing of

payments and reducing the amount of debt.

In the contemporary world practice, the difficulties of many

countries in paying their government debt have led to the existence of

four basic techniques (Grandars, 2019) for restructuring and managing

government debt change of debt obligations with others (“bonds-bonds”),

the exchange of debt obligations for shares within the framework of the

state privatization programme (“bonds-shares”), pre-term repayment of

debt at a discount (“redemption”), writing-off part of the debt. The

widespread method of restructuring government debt is the exchange of

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“problem” debt liabilities into new ones. The most common way to

conduct such transactions is the “Brady Plan”. In the “Brady Plan”

(Trade Association for the Emerging Market, 2019), the government of

the country that intends to restructure its government debt reach certain

agreements with the International Monetary Fund and together with it

develops a programme for restructuring the economy, including the

provision of new credit resources to the country.

The importance of a well-specified structure of governance that

provides for clear authorities and responsibilities, including the legal

framework and the organizational structure, as well as the capacity of

the staff and systems within this organizational structure to carry out

their responsibilities. The need for a clear framework for evaluating

alternative strategies for managing the governments debt and

determining the appropriate strategy, and the importance of evaluating

the costs and risks of these strategies in this evaluation and managing

the risks (http://pubdocs.worldbank. org/en/ 903731510086355711

/PDM-Publication DomesticDeb/March/2020).

In the particular case of Spain, on which we focus, local councils

have become responsible for a growing number of powers (although still

much lower than regions or comunidades autónomas), with a

corresponding increase in the functions they perform, and the resulting

higher expenditure levels. In addition, their basic resources are often

insuffificient to keep pace with the rate of growth of their expenditure

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needs (López-Hernández et al., 2012).1 These circumstances have led to

high levels of indebtedness in most local government administrations.

Although the problem of local debt is relatively modest on a national

scale, due to the lower importance of the local public sector compared to

the other public administrations (central and regional),2 it has become a

threat to local government solvency and moreover, may have a negative

effect on macroeconomic financial stability (International Public

Management Journal,2015) .

The severity of these issues has increased considerably since the

start of the financial crisis, which was followed by a real economic crisis,

resulting in the burst of the housing bubble, a deep recession, and rising

unemployment, which more than doubles the average rate in the

European Union (EU). This new macroeconomic scenario has had a

remarkable impact on the public sector, leading to very high levels of

deficit across all strata of public administrations considered, i.e., central,

regional and local, although the level of total debt is still lower than that

of many other EU countries. In this new economic context, local

governments have not been left unscathed, and for most of them the

financial difficulties affecting them practically since the Spanish

constitution was approved in 1978 have been exacerbated. The crisis has

led to a sharp decline in municipal revenues while, simultaneously, their

costs have either stagnated or even increased, which impels local

governments to find new tools for dealing with the new financial scenario
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(Brusca Alijalde et al., 2012). Therefore, it seems reasonable to design

policies which take into account the major sources of debt for Spanish

municipalities (International Public Management Journal,2015) .

In the Philippines, the current administration has made fiscal

sustainability the cornerstone of its governance agenda. Efforts are being

undertaken by the government to improve tax collection. It may be noted

that the national government’s (NG) revenue collection scaled to GDP has

been stable, rising by 14.2 percent in 2010, which is slightly lower than

the previous year’s 14.6 percent growth. The tax effort (tax collection to

GDP ratio) was unchanged at 12.8 percent in 2010 and 2009, but

comparably lower than the ratio in 2008 of 14.2 percent. It is in this light

that the government has implemented measures to improve the

government’s tax collection such as the Run Against the Tax Evaders

(RATE), Run After the Smugglers (RATS) and Revenue Integrity Protection

Service (RIPS). Moreover, measures to rationalize the government’s fiscal

incentive programs are underway to minimize their negative impact on

the government’s revenues.

In addition, the government has embarked on a pro-active debt

management strategy which aims to reduce the debt stock and debt

service payments and lengthen the maturity profile where feasible

through debt swaps and exchanges. Debts with longer duration enable

the government to finance urgent programs necessary for economic

development such that when these debts mature, the country could
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easily repay them on the back of the economy’s improved capacity

(Department of Economic Research Monetary Stability Sector, 2011).

The Urdaneta City is the center of trade, commerce and industry

in Eastern Pangasinan. The city is also a strategic area for agricultural

production in the province. It also serves as distribution center and

provides tertiary education and medical services in said portion of

Pangasinan (National Economic and Development Authority Regional

Office, 2017). With its profile as one of the performing city in Region I , it

reflects how the city manage its finances effectively.

In view of the aforementioned scenario, the researcher wanted to

study critically and analyzed the debt management system of the Local

Government Unit (LGU) of Urdaneta City Pangasinan. The results of the

study served as the basis of the formulation of debt management

framework in sustaining the Fiscal operations of the city.

Theoretical Framework

This study adopted the Barro's theory of neutrality of debt, i.e. of

equal effects of tax financing and debt financing (1974). According to

Barro, debt issuance has no influence on wealth, aggregate demand,

interest rates and formation of capital, its only function is to provide

greater flexibility for the government in intertemporal balancing of public

revenues and public expenditures (Barro and Grilli, 1994).

Barro and his followers observed the state as a "benevolent social

planner" whose aim is to maximize the welfare of members of the society.

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They believed that the effects of fiscal policy (that is - taxation) are least

distorted if tax rates are constantly kept on the same level. Since

economies pass through periods of expansion and periods of recession,

with constant tax rates they will undergo alternate periods of budget

deficit and budget surplus. Also, the appearance of deficit or surplus will

depend on the effect that some external factors have on public

expenditures. Thus, debt will be used in periods of temporary increase in

public expenditures (especially in periods of war and big crises), while in

post-war (post-crisis) periods unchanged rates will generate budget

surplus which will compensate for the present deficit in terms of its

current value (Heinemann, 1992; result of pursuing such a policy in the

periods when it is justified.

The present study anchored on the Barro's theory of neutrality of

debt to assessed the debt management system of local government unit

of Urdaneta City. The study also determined the local practices of the

local finance committee as well as the success and limiting factors and

problems as the basis for the proposed localized debt management

framework for the Local Government Unit of Urdaneta City.

Conceptual Framework

This study was anchored to the concept of Public debt

management intended to design the government’s debt portfolio in a

targeted and efficient way. The International Monetary Fund(2014)

describes public debt management as “the process of establishing a

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strategy for managing the government’s debt in order to raise the

required amount of funding at the lowest possible cover cost over the

medium to longrun, consistent with a prudent degree of risk.” Public

debt management is an everyday business that is not only relevant when

a budget deficit has to be financed or maturing debt has to be repaid.

Debt management relates to the total stock of outstanding debt, whose

structure (e.g. currency denomination, creditor base, maturity structure

and interest rates) can be changed through operations on the money and

capital markets. While debt management in the private sector primarily

aims to minimize costs and risks, debt management in the public sector

(DeM) can pursue additional goals, such as macroeconomic stabilization

(Tobin 1963), tax burden smoothing (Barro 1995) or a stabilization of the

public budget (Missale 2000).

Governments regularly borrow to finance public expenditures.

Overall, the decision on the amount to be borrowed should be based on a

sustainability analysis of public debt. Such fiscal sustainability typically

relates to the solvency of the government, i.e. the ability to continue

servicing its debt without an unrealistically large future correction of the

budget balance or an explicit default (Burnside 2005, IMF 2007). To raise

the intended funds, public debt managers have to choose suitable

finance instruments and seek for the best borrowing conditions, i.e. to

raise the funds at the lowest cost. Additionally, they have to structure

the debt portfolio in a way such that negative effects of economic or

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financial shocks on the public budget are minimized ( Melecky 2007).

Thus, financing public debt in an efficient manner requires a

complex multiperspective approach. Generally, public debt management

describes the process of establishing and implementing a prudent

strategy for raising the required amount of funding, while considering the

government’s cost and risk preferences. In any event, the government

may set additional goals, such as developing and maintaining an efficient

market for government securities. In practice, public debt management

usually involves the following tasks (Wheeler 2004): Establishing clear

public debt management objectives within a sound governance

framework, including a prudent cost and risk management strategy and

accompanying portfolio management policies; Establishing an efficient

organizational structure and appropriate management information

systems; Ensuring that all portfoliorelated transactions are consistent

with the government’s debt management strategy while being efficiently

executed and Establishing reporting procedures to ensure that the

government’s debt managers are accountable for their assigned debt

management responsibilities and assignments.

This study was anchored on the LGU Financing Framework was

formulated by the Department of Finance (DOF) in response to the 1991

Local Government Code (LGC) which mandated the devolution to LGUs of

many functions previously carried out by national government line

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agencies. Although the LGUs were given an increased share of national

government revenues and they were clamoring for more direct access to

Official Development Assistance (ODA), these would not be enough to

meet their increased need for financing. LGUs would have to improve

their capacity to generate their own revenues and also gain access to

private capital markets. The framework proposed various means through

which the GFIs and Municipal Development Fund (MDF) could utilize

financial and technical assistance from ODA sources and internally

generated funds to help LGUs meet these objectives.

The LGU Financing Framework was based on the premise that

LGUs have varying degrees of creditworthiness and that LGU credit

needs could best be served by a policy of market segmentation, along

with a policy of “graduation” of creditworthy LGUs to the private sector.

Under this policy, the higher-income, more creditworthy LGUs would

avail of private commercial finance except possibly for environmental and

social projects; the GFIs would serve the middle tier of LGUs; and the

MDF would serve the lower tiers. LGUs were expected to move up the

ladder over time.

The present study employed the Input-Process-Ouput (IPO) as

shown on Figure 1. The input box covered the extent of implementation

of the debt management system of the LGU of Urdaneta City as assessed

by the implementers in terms of objective and coordination,transparency

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and accountability, institutional framework,management framework and

management strategy and the facilitating success and limiting factors are

observed with the extent of implementation of debt management.

INPUT PROCESS OUTPUT

1. Extent of
implementation of the
debt management
system of the LGU of
Analysis of data
Urdaneta City as as Proposed debt
assessed by the gathered on the
management
implementers in terms extent of
of: framework can
implementation of
a.objective and be formulated to
debt management
coordination sustain the
b.transparency and of the LGU of
Fiscal operations
accountability Urdaneta City and
c. institutional
of the city.
facilitating factors
framework on the the
d.management
framework implementation of
e.management strategy debt management
system.
2.Facilitating success
and limiting factors
observed with the
extent of
implementation of debt
management system in
i LGU of Urdaneta
the
City.

FEEDBACK

Figure 1. Paradigm of the Study

Furthermore, the process box covered the analysis of the data

gathered in terms of extent of implementation of debt management

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system of the LGU of Urdaneta City and facilitating success and limiting

factors on the the implementation of debt management. The outcome box

contains the formulation of the proposed debt management framework

can be formulated to sustain the Fiscal operations of the city. The

feedback box contained the possible revisions of the debt management

framework after it was tried-out by the city.

Statement of the Problem

This study critically analyzed the debt management system of the

Local Government Unit (LGU) of Urdaneta City in Pangasinan. The

results of the study served as the basis of the formulation of debt

management framework in sustaining the Fiscal operations of the city.

Specifically, it sought to answer the following questions:

1. What local practices and their extent of implementation of the

debt management system are undertaken by the LGU of Urdaneta City

as assessed by the implementers along the following aspects :

a. objective and coordination;

b. transparency and accountability;

c. institutional framework

d. risk management framework; and,

e. debt management strategy?

2. What critical success and limiting factors are observed in line

with the local debt management practices of Urdaneta City?

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3. What implementation related problems are identified with the

local debt management practices of Urdaneta City?

4. What debt management framework can be formulated to

sustain the fiscal operations of the city?

Assumptions of the Study

This study is based on the subsequent assumptions:

1. The instrument used in gathering the needed data is valid and

reliable.

2. The respondents of the study gave sincere answers during the

interview as well as the right data and information on the questionnaires.

3.The proposed debt management framework formulated can

sustain the Fiscal operations of the city.

Scope and Delimitation of the Study

The study focused on the the extent of implementation by the debt

management system of the LGU of Urdaneta City as assessed by the

implem enters in terms of the following aspects such as objective and

coordination, transparency and accountability, institutional framework,

risk management framework and debt management strategy as well as

facilitating success and limiting factors were observed with the extent of

implementation of debt management system. The participants of the

study were the group of debt management system particularly the city
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administrator , head of accounting, budget and treasury department. The

other aspects of debt management were not included in the study to

magnify the best practices of the city in the above-mentioned aspects in

debt management.

Significance of the study

It is desired that the results of the study helpful to the following

entities:

Local Government Units of Urdaneta City. The result of the

study will provide the officials with useful information as basis in

determining treasury management policy directions to attain the local

goals as well as the national goals. It may serve as a springboard in

enhancing the provisions of crafting ordinances related to their

respective debt management.

Local Finance Committee. It will provide them comprehensive

information necessary in decision-making. It will help them identify the

strengths and weaknesses of the activities in the implementation of the

ordinance so that they will be guided to come up with measures and

enhance its full implementation.

Public Administration Practitioners. They may be provided with

valuable guides in the revision of policies that seem unfeasible and in the

formulation of more effective programs/ measures.

Future Researchers. The output will serve as a repository of

valuable data for those who would endeavor to undertake studies related
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debt management of the treasury department of the local government

units related to the present study.

Definition of Terms

To provide a common frame of reference, the following are defined

according to how they were used in the study.

Debt Management System of the Local Government of

Urdaneta City . This pertains to the extent of implementation of the

debt management system of the LGU of Urdaneta City assessed by the

implementers in terms of objective and coordination, transparency and

accountability, institutional framework, risk management framework;

and debt management strategy.

Objective and Coordination. This refers to how the Local

Government Unit of Urdaneta City ensure that the government’s

financing needs and its payment obligations are met at the lowest

possible, fiscal, and monetary policies given the interdependencies

between their different policy instruments, Debt managers convey

to fiscal authorities their views on the costs and risks associated

with government financing requirements and debt levels, debt

management, fiscal, and monetary authorities share information

on the government’s current and future liquidity needs.

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Transparency and Accountability. This pertains to debt

management practices of LGU in Urdaneta City in terms of the

following aspects such as debt managers shares an understanding

of the objectives of debt management, Fiscal, and monetary

policies given the interdependencies between their different policy

instruments, debt managers convey to fiscal authorities their views

on the costs and risks associated with government financing

requirements and debt levels, objectives for debt management are

clearly defined and publicly disclosed, and the measures of cost

and risk that are adopted should be explained, Important aspects

of debt management operations should be publicly disclosed, the

public are provided with information on the past, current, and

projected budgetary activity, including its financing, and the

consolidated financial position of the government, the public are

provided with information on the past, current, and projected

budgetary activity, including its financing, and the consolidated

financial position of the government, debt management activities

are audited annually by external auditors.

Institutional Framework. This refers to to debt

management practices of LGU in Urdaneta City in terms of the

following aspects such governance , management of internal

operations.

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Risk Management Framework. This refers to how the Local

Government Unit of Urdaneta City on how the risks inherent in the

structure of the government’s debt are carefully monitored and

evaluated, risks are mitigated to the extent feasible by modifying

the debt structure, taking into account the cost of doing so,

consider the financial and other risk characteristics of the

government’s cash flows, carefully assess and manage the risks

associated with foreign-currency and short-term or floating rate

debt and there are cost-effective cash management policies in place

to enable the authorities to meet with a high degree of certainty

their financial obligations as they fall due.

Debt Management Strategy. This refers to to debt

management practices of LGU in Urdaneta City in terms of the

following aspects such a framework are developed to enable debt

managers to identify and manage the tradeoffs between expected

cost and risk in the government debt portfolio, scope for active

management, contingent liabilities and development and

maintenance of an efficient market for government securities.

Factors. It refers to the issues and concerns of the encountered by

the local government units in debt management as assessed by the

local finance committee in the city.

Debt Management Framework. This pertains to the proposed

strategies that will enhance the debt management measures of the of

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Urdaneta City in terms of the following aspects such as objective and

coordination, transparency and accountability, institutional framework,

risk management framework; and debt management strategy .

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